Mohamed El Hedi AROURI
(EconomiX)

International Portfolio Choice:
Diversification, Currency Risk and Stock Markets Integration Dynamics.

Abstract :

In a context characterized by floating exchange rates and a strong progression of financial globalisation, this thesis studies the main determinants of international portfolio choice. It is built around three research orientations: international diversification, currency risk and finally the dynamics of stock markets integration. Our analysis, as well theoretical as empirical, showed that stock markets became more integrated during the recent period. Nevertheless, the factors, the dynamics and the effects of integration are not the same for emerging and developed markets. In particular, our results showed that the expected gains from world diversification are significant for all markets, but that gains are considerably larger for investors with smaller home markets. Interestingly, there is only a slight tendency for expected gains from world diversification to decrease over time in response to markets integration. Moreover, we showed that exchange rate risk is priced for both developed and emerging stock markets and that currency premium constitutes a significant component of the international risk premium.

Keywords : Developed and emerging stock markets, international risk premium, portfolio diversification, home bias, currency risk, financial integration, liberalisation, contagion, asset pricing.

JEL codes : C32 ; C33 ; F31 ; F36 ; G11 ; G12 ; G15.